The New Electric Company

START

Microsoft is a 21st-century utility – fat, slow, and vulnerable.

Ninety years ago, Theodore Vail – the president of AT&T – made a historic compromise. Vail believed that the telephone business needed to be run by one company – only then could it guarantee "communication with anyone that may possibly be wanted, at any time." So AT&T set about gobbling up competitors across the country, putting together the first nationwide phone network. For Vail's strategy to fly, though, there was one big hump to get over: the government, which was threatening AT&T with trust-busting on the one hand and nationalization on the other. So Vail cut a deal with the Justice Department, accepting regulation in exchange for sanctioned control of the telephone business.

This article has been reproduced in a new format and may be missing content or contain faulty links. Contact wiredlabs@wired.com to report an issue.

Wired Staff

Almost a century later, another monopoly made its own deal with the Justice Department. With the ratification of its settlement with the Feds in November, Microsoft's control of the desktop is now state-approved. The ruling acknowledges a simple reality: Windows is too important a standard to muck up. In effect, Judge Colleen Kollar-Kotelly's decision declared that Ma Bill is America's most important utility company.

But, there's one big difference between the deals that AT&T and Microsoft cut: AT&T gave up a lot, and Microsoft gave up very little. Sure, the decision lays down the law – it restricts Microsoft's control of the desktop, requires the company to ensure that non-Microsoft applications work with Windows, and prohibits retaliation against firms that don't do what Microsoft wishes they would do. But Kollar-Kotelly explicitly rejected the kind of regulatory apparatus that once governed AT&T. This was pretty much inevitable: Not many people want Washington bureaucrats making key decisions about the future of software. As a result, Redmond seems to have the best of both worlds. It has a tacit state endorsement of its monopoly without any of the burdensome regulation. And that has Microsoft's would-be competitors saying, "Game over." Without stricter controls, the reasoning goes, there will be no stopping Microsoft as it uses its dominant position to muscle into other markets, from handhelds to digital entertainment to servers.

The glitch in this argument, ironically, is that it doesn't take the idea of Microsoft as a utility company seriously enough. Consider that two-thirds of the company's revenue comes from desktop and office software. Those markets are insanely profitable, but they're also growing slowly. Yes, Microsoft will continue to enjoy huge margins and hefty, utility-like cash flow for years to come. But the company is facing a problem that some have suggested the entire technology industry may soon confront: When you are the market, you can't grow faster than the market. Just look at AT&T. The more people with phones, the harder it was for AT&T to sell phones. Microsoft faces the same fate with PCs.

Bill Gates and Steve Ballmer know this all too well, which is why they're so interested in those greener pastures that everyone is afraid they'll take over. But, in fact, there's little evidence that Microsoft's dominance of the desktop will translate to dominance elsewhere. Microsoft doesn't control a single post-PC market, and in those where it has established a serious foothold, it's done so not by relying on Windows, but by doing exactly what upstart competitors typically do – target the low end with bargain prices and then win more customers as the technology improves. That's been good for users, but not so great for Microsoft's profit margins.

It's hard to know if the company's made a dime off Windows Media Player or Internet Explorer. MSN still isn't making money, and the much-vaunted .Net initiative is struggling for traction. Microsoft may be the PC world's equivalent of AT&T circa 1913, but the PC is no longer the center of computing. That doesn't mean the company will fail in all these arenas. But whatever Microsoft gets from here on out, it will earn. And that is good news for consumers.

Of course, the company's would-be competitors are loath to admit this. But it's time for them to get their heads out of the courtroom and into the marketplace. There was always something cognitively dissonant about Silicon Valley looking to the state for protection. And antitrust law is a very blunt instrument with which to manage the economics of software and the problem of standardization. Ultimately, the best thing about the settlement may be that it will force Redmond's competitors to stop believing that Microsoft is so impregnable that only the government can stand in its way. Controlling the dial tone is nice. But when people stop using phones, it's a brand-new game.

Here’s The Thing With Ad Blockers

We get it: Ads aren’t what you’re here for. But ads help us keep the lights on. So, add us to your ad blocker’s whitelist or pay $1 per week for an ad-free version of WIRED. Either way, you are supporting our journalism. We’d really appreciate it.